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Sinking Dollar Dominates
Davos DebateThe Ledge/NY Times
By MARK LANDLER
New York Times
Thursday, January 27, 2005

DAVOS, Switzerland, Jan. 26 - Two things were as clear as the
Alpine air on the opening day of the World Economic Forum on
Wednesday: The relentlessly sinking dollar is Topic A, and anyone
hoping for an answer to when it will stop dropping is likely to
come away disappointed.

Economists, politicians and business executives voiced deep
unease about the imbalances in the global financial system, which
are reflected in the dollar's steep fall against the euro and
other currencies.

But most expressed skepticism that the Bush administration
would reduce the trade and budget deficits, which have fed those
imbalances. The White House has said that it does not view these
issues as a major problem because foreigners still view the
American economy as an attractive investment.

Some at the forum said they doubted that China, which is
financing much of the American debt, would bow to pressure to
allow its currency to rise against the dollar this year.

"The U.S. current-account deficit is a problem for the whole
world," said Jacob A. Frenkel, a former governor of the Bank of
Israel. But, he said, "I don't see the budget deficit being taken
seriously."

The Bush administration, which dispatched Vice President Dick
Cheney and Secretary of State Colin L. Powell to past Davos
meetings to defend the Iraq war and other foreign policy actions,
has not sent a similarly prominent economic policy maker to this
gathering. That absence has lent the proceedings an imbalanced
tone.

"In fairness, it's a transition period in Washington," said
Representative Barney Frank, Democrat of Massachusetts, who
supplied the American voice on a panel about American leadership.
He added, however, "The administration doesn't really have anyone
they trust enough to send here."

Mr. Frank, the ranking Democrat on the House Financial
Services Committee, said that he worried that the United States
was not paying enough attention to the risks of its growing
indebtedness. The repercussions of a weak dollar, he said, had
barely registered with the White House.

Other critics were blunter.

"There's nobody home on economic policy in America right now,"
said Stephen S. Roach, the chief economist at Morgan Stanley. The
twin burdens of household and public debt in the United States,
he said, are unsustainable. Describing American consumers as "an
accident waiting to happen," he asked, "When does the music
stop?"

With the dollar already trading at $1.30 to the euro - near
the level of economic unacceptability for Europe - Mr. Roach said
the United States could not rely on currency markets to right the
imbalance between it and the Asian countries that finance
American deficits by buying Treasury bills.

The answer, he said, lies with the Federal Reserve, which he
said would have to raise rates aggressively to curb the spending
binge. Whether it could do that without triggering a recession is
an open question.

Few here held out hope for international coordination of the
kind that stabilized the dollar in the 1980's.

"The Bush administration doesn't listen to people," said Laura
D. Tyson, who served as an economic adviser to President Bill
Clinton. "There's no hope of changing U.S. fiscal policy."

Professor Tyson, who is dean of the London Business School,
said European leaders needed to stop worrying about the actions
of other countries and set about streamlining their own
economies. She pointed to recent wage negotiations in Germany, in
which the unions agreed to longer hours and more flexible work
rules, as a hopeful sign of change.

Certainly, Europe cannot rely on Asia to take the pressure off
the euro. While people here said they were guardedly optimistic
that China would eventually allow its currency, the yuan, to rise
against the dollar, few were willing to hazard a guess as to when
- or to what extent.

"That will need a political commitment and a political will,
and I don't see that happening this year," said Takatoshi Ito, a
specialist in international economics at the University of
Tokyo.

Some economists warned that the expanding trade deficit and
weak dollar could cast a shadow over negotiations to liberalize
world trade, which have been dragging for various reasons in the
last year.

China's record trade surplus with the United States could fuel
protectionist forces in the United States, said C. Fred Bergsten,
the director of the Institute for International Economics in
Washington. He said he could foresee moves to impose import
barriers on Chinese wood and shrimp. "This is a poisonous
environment for trade policy and for domestic politics in the
United States."

In the last couple of years, with the White House's march to
war in Iraq, Davos itself has been a rather poisonous environment
for Americans. Those tensions have ebbed this year.